Juggling Dynamite

With the Canadian TSX today virtually unchanged from its April 2008 peak, even the most steadfast buy and hold investors have reaped zero capital gains over more than 12 years of risk and just 1.7% annually since the prior cycle peak in July 2000.  Those who bought GICs and government bonds over these same periods earned significantly more with a fraction of the volatility.

As the current bear market continues its mean reversion course over the next several months, equity underperformance will get worse, and more of the present holders will exit with losses. This leads credit-rating agency Fitch to warn of a revenue hit unfolding in the financial sector.  See Canadian Bank Wealth Management Pressured:

“…Fitch expects elevated market volatility, leading to a sustained lower level of investor confidence, lower AUM (assets under management) and AUA (assets under advisement) levels and thus depressed mutual fund revenues over the near to medium term. Revenues could also be hurt if investors shift to more defensive mutual funds, such as pure fixed-income funds, as these funds have low expense ratios given their low returns.”

And therein lies everything one needs to understand about the investment management and advisory business:  the dominant business models is designed to collect the most fees when customers hold the riskiest assets (debt and shares of corporations).  Keeping their customers holding the most risk is therefore the financial industry’s perpetual bias even when doing so is detrimental to the needs, goals and best interests of said customers.

As more people cash out with losses, wealth management and capital markets revenues will be pressured for the remainder of 2020, Fitch has warned.  This is leading an even greater industry focus on high fee wealth management products and services such as estate and insurance planning.

Customers should be very wary.

Join Hedgeye CEO Keith McCullough and Danielle DiMartino Booth, former Fed advisor and Chief Strategist at Quill Intelligence, in this pro-to-pro investing discussion about the current market environment.

Here is a direct video link.

“In investing, the average consequences of risk make up most of the daily news headlines. But the tail-end consequences of risk – like pandemics, and depressions – are what make the pages of history books. They’re all that matter. They’re all you should focus on. We spent the last decade debating whether economic risk meant the Federal Reserve set interest rates at 0.25% or 0.5%. Then 36 million people lost their jobs in two months because of a virus. It’s absurd.  Tail-end events are all that matter.  Once you experience it, you’ll never think otherwise.”  –Morgan Housel, The Three sides of Risk, May 19, 2020

Lockdowns and layoffs have given the masses both free time and a plunge in income over the past three months. This has led to a surge in gambling appetite, hoping to win money through online trading.  Last October’s switch by brokers to commission-free trades has helped to grease the mania even as custodians make hidden fees on credit balances and selling advance notice of their customer order flow to frontrunners.

It has always been the case that the public buys most at market tops and least near market bottoms.  According to data from the Financial Times, 780,000 people opened accounts with three of the four largest brokerages in the US: Charles Schwab, E-Trade, and Interactive Brokers year to date.

Besieged by click-bait and ‘how to play’ tips from the financial sales side, most participants will lose money as usual.  The trouble is, very few can afford to lose what savings they have left, and this makes our collective economic situation even more precarious. Worse, many are drawing on margin and other credit to fund their bets in financial suicide.

The overconfidence and ignorance of so many participants are writ large in chat rooms and comments on financial sites everywhere today.  This is familiar and foreboding. See  It’s a perfect storm of stupid in the stock market right now:

This herd of newbies has charged into the market at a time of incredible uncertainty. Hundreds of companies in the S&P 1500 have withdrawn their revenue guidance for 2020, leaving these new investors with little to go on in the way of forward-looking statements.

…In sum, what we have in the market is an unholy mess. We have bored, unseasoned, emotionally conflicted investors playing around in a murky pool where one of the most opaque sectors [vacinne development] has the ability to make the biggest waves. It’s very stupid — people are going to drown.